Market Developments
The rise in long-term US Treasury yields was the main market development this week. The gross federal debt crossed $40 trillion on 18 August, made up of $32.3 trillion held by the public and $7.8 trillion of intragovernmental holdings, reached roughly five months after the $39 trillion mark in March. The 10-year Treasury yield returned to around 4.70% and the 30-year to roughly 5.25%, despite Treasury’s announcement that it would double its long-end buyback programme to at least $4 billion per operation from 9 September; the announcement briefly pulled the 30-year yield down, but the move reversed within days.
- The increase occurred despite a weak July payrolls report and moderating inflation, conditions that would ordinarily put downward pressure on yields, pointing to investors requiring more compensation for holding long-dated debt given heavier government borrowing and reduced Fed forward guidance under new Chair Kevin Warsh.
The S&P 500 fell 1.4% and the NASDAQ 2.5%, as the bond market rather than earnings set the tone, even with S&P 500 earnings on pace to grow more than 48% year on year in the second quarter. Developed equity markets outside the US also declined, with the Nikkei down almost 4% and the Stoxx 600 posting its largest weekly decline since early July, both weighed down by higher global yields and a more than 5% rise in oil prices. Indian equities held up better, with the Sensex down 0.6%, as domestic liquidity offset cautious foreign flows even as higher crude added to inflation and current-account concerns.
- Two moves ran against this trend: the Hang Seng gained 3.6% on a rally in Asian memory-chip and AI-linked names, and MSCI EM rose 1.2% even as developed markets fell, consistent with a dollar index that weakened roughly 0.9% and eased pressure on EM currencies.
Commodities outperformed, with Gold rising more than 5% to a three-month high above $4,600 on the weaker dollar and fiscal concerns revived the “debasement” trade, while Brent-linked crude gained more than 5% to around $94 a barrel on the deadlock over Iran and the Strait of Hormuz, adding oil-price pressure on top of higher long yields for duration-sensitive equities and energy importers. The combination of higher oil and higher long yields is a challenging mix for duration-sensitive equities and imported-energy economies.
